Econ 240 C Lecture 13

2 Part I. CA Budget Crisis

3 CA Budget Crisis w What is Happening to UC? UC Budget from the state General Fund

4 UC Budget w Econ 240A Lab Four w New data for Fiscal Year w Governor’s Budget Summary released January

UC Budget, through Fiscal Year Millions $

6 CA Budget Crisis w What is happening to the CA economy? CA personal income

8 CA Budget Crisis w How is UC faring relative to the CA economy?

UC Budget Vs. CA Personal Income, through CA Personal Income, $B UC Budget, $B

10 CA Budget Crisis w What is happening to CA state Government? General Fund Expenditures?

12 CA Budget Crisis w How is CA state government General Fund expenditure faring relative to the CA economy?

CA Size of Government Vs. CA Economy, through CA Personal Income $ B CA General Fund Expenditure $B

14 Long Run Pattern Analysis w Make use of definitions: w UCBudget = (UCBudget/CA Gen Fnd Exp)*(CA Gen Fnd Exp/CA Pers Inc)* CA Pers Inc w UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc

15 What has happened to UC’s Share of CA General Fund Expenditures? w UC Budget Share = (UC Budget/CA Gen Fnd Exp)

17 CA Budget Crisis w Estimate of UC’s Budget Share for : 4.25 % or 4.85% will the legislature lower UC’s share?

18 What has happened to the size of California Government Expenditure Relative to Personal Income? w Relative Size of CA Government = (CA Gen Fnd Exp/CA Pers Inc)

20 California Political History w Proposition 13 approximately 2/3 of CA voters passed Prop. 13 on June 6, 1978 reducing property tax and shifting fiscal responsibility from the local to state level w Gann Inititiative (Prop 4) In November 1979, the Gann initiative was passed by the voters, limit real per capita egovernment expenditures

21 CA Budget Crisis w Estimate of the relative size of the CA government: 6.75% vs %?

22 CA Budget Crisis: Pattern Estimate of UCBudget w UC Budget = UC Budget Share*Relative Size of CA Government*CA Pers Inc w Midpoint estimate: w UC Budget = *.0605* $B =$ 3.24 B estimate w Governor’s proposal in January: $ 3.04 B w So, $ 3.24 B is probably too optimistic

23 Econometric Estimates w Linear Trend Estimate w UCBUD(t) = a + b*t +e(t) about same as Governor’s January proposed $ 3.04 B Lucky?

25 Econometric Estimates w Logarithmic (exponential trend) w lnUCBUD = a + b*t +e(t) w simple exponential trend will over-estimate UC Budget

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28 Econometric Estimate w Dependence of UC Budget on CA Personal Income w UCBUD(t) = a + b*CAPY(t) + e(t) w looks like a linear dependence on income will overestimate the UC Budget for

30 Econometric Estimates w How about a log-log relationship w lnUCBUD(t) = a + b*lnCAPY(t) + e(t) w autocorrelated residual w fitted lnUCBUD( ) = $3.27 B w actual (Governor’s Proposal) = $3.04B

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34 Econometric Estimates w Try a distributed lag Model of lnUCBUD(t) on lnCAPY(t) clearly lnUCBUD(t) is trended (evolutionary) so difference to get fractional changes in UC Budget likewise, need to difference the log of personal income

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41 Estimate ARONE Model for dlncapy(t) w Orthogonalize dlncapy and save residual w need to do transform dlnucbud w dlnucbud(t) = h(Z)*dlncapy(y) + resid(t) w dlncapy(t) = 0.732*dlncapy(t-1) + N(t) w [ Z]*dlnucbud(t) = h(Z)* [ Z]*dlncapy(t) + [ Z]*resid(t) w i.e. w(t) = h(Z)*N(t) + residw(t)

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43Orthogonal residuals from ARONE Model for dlncapy

44 Distributed Lag Model w Having saved resid as res[N(t)] from ARONE model for dlncapy w and having correspondingly transformed dlnucbud to w w cross-correlate w and res

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46 Distributed lag model w There is contemporary correlation and maybe something at lag one w specify dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + resid(t)

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48 Dlnucbud c dlncapy dlncapy(-1)

49 w Try a dummy for , the last recession, this is the once and for all decline in UCBudget mentioned by Granfield w There is too much autocorrelation in the residual from the regression of lnucbud(t) = a + b*lncapy(t) + e(t) to see the problem w Look at the same regression in differences

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54 Distributed lag Model w dlnucbud(t) = h 0 *dlncapy(t) + h 1 *dlncapy(t-1) + dummy ( ) + resid(t) w

55 SER =

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57Fitted fractional change in UC Budget is versus Governor’s proposal of

58 Correlogram of the residuals ducbud c dlncapy dlncapy(-1) dummy

59 Distributed lag Model w Modify the specification; drop dlncapy(t) to get a forecasting model w dlnucbud(t) = h 1 *dlncapy(t-1) + dummy ( ) + resid(t)

60 SER =

61 Residuals from dlnucbud c dlncapy(-1) dummy

62 Distributed Lag Model w Try modeling the residual with an ar(7) w Try modeling the residual with an ma(7)

63 SER =

64 SER =

65Correlogram of residuals from dlnucbud c dlncapy(-1) dummy ma(7)

66 Fitted fractional change in UC Budget is versus Governor’s proposal of

67 Conclusions w Governors proposed cut in UC Budget of 4.8% is greater than expected from various models w The UC Budget growth path ratcheted down in the recession beginning July 1990 w The UC Budget growth path may be ratcheting down again in the recession beginning March 2001 it may be too early to tell

Fitted through lnucbud

69 dlucbud c dlncapy(-1) dummy for dummy2 for ma(7)

70 dlnucbud c dlncapy dummy for dummy2 for